Amendments to Statement of

Financial Accounting Concepts No. 8

August 2018

Conceptual Framework for Financial Reporting

Chapter 3, Qualitative Characteristics of Useful
Financial Information
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 Amendments to Statement of
Financial Accounting Concepts No. 8
August 2018

Conceptual Framework for Financial Reporting

Chapter 3, Qualitative Characteristics of Useful
Financial Information

Financial Accounting Standards Board

401 MERRITT 7, PO BOX 5116, NORWALK, CONNECTICUT 06856-5116
Amendments to Statement of Financial Accounting
Concepts No. 8

Conceptual Framework for Financial Reporting

Chapter 3, Qualitative Characteristics of Useful Financial

Information

August 2018

CONTENTS
Page
Numbers

Summary............................................................................................................1–2
Amendments to the Conceptual Framework for Financial Reporting.................3–6
Summary
Introduction to the Conceptual Framework
FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting,
establishes the concepts, along with other FASB Concepts Statements, that
underlie financial reporting standards. When completed, the framework is
expected to be a coherent system of concepts that flow from the objective of
financial reporting. The concepts provide the FASB with a framework for selecting
the transactions, events, and circumstances to be represented; how those items
should be recognized and measured; and how they should be summarized and
presented or disclosed in financial reports.

Why Is the FASB Issuing These Amendments?

The FASB is issuing these amendments to Chapter 3, Qualitative Characteristics
of Useful Financial Information, of Concepts Statement 8 to ensure that the
materiality concepts discussed are consistent with the definition of materiality used
by the U.S. Securities and Exchange Commission (SEC), the auditing standards
of the Public Company Accounting Oversight Board (PCAOB) and the American
Institute of Certified Public Accountants (AICPA), and the United States judicial
system. Respondents to the 2012 FASB Invitation to Comment, Disclosure
Framework, and the 2014 proposed FASB Concepts Statement, Conceptual
Framework for Financial Reporting—Chapter 8: Notes to Financial Statements,
along with other stakeholders, have requested these amendments to eliminate
inconsistencies between the framework and the definition used by other standard
setters, regulators, and other participants in the financial reporting system in the
United States.

Authoritative Status of the Framework

Paragraph 105-10-05-03 of the FASB Accounting Standards Codification® states
that FASB Concepts Statements are nonauthoritative. Furthermore, paragraph
105-10-05-02 states that if guidance for a transaction or event is not specified
within a source of authoritative generally accepted accounting principles (GAAP)
for that entity, the entity first must consider accounting principles for similar
transactions or events within authoritative GAAP. If none exists, then the entity
should consider nonauthoritative guidance from other sources (including Concepts
Statements).

1
What Are the Main Amendments?
The main amendment to Chapter 3 of Concepts Statement 8 reinstates the
definition of materiality that was in FASB Concepts Statement No. 2, Qualitative
Characteristics of Accounting Information, which was superseded in 2010 by
Concepts Statement 8. Another amendment to Chapter 3 of Concepts Statement
8 adds language similar to that in Concepts Statement 2, which discusses:
a. How materiality differs from relevance
b. That materiality assessments can be properly made only by those with an
understanding of the reporting entity’s pertinent facts and circumstances.

2
Amendments to the Conceptual
Framework for Financial Reporting

Introduction
1. Concepts Statement 8 is amended as described in paragraphs 2 and 3. The
amendments include changes to both Chapter 3 on the qualitative characteristics
of useful financial information and the chapter’s basis for conclusions. Unlike the
basis for conclusions related to amendments to the Accounting Standards
Codification, the basis for conclusions in a Concepts Statement is integral to the
Concepts Statement to which it relates. Therefore, changes to the basis for
conclusions (BC) paragraphs are marked similar to the qualitative characteristics
(QC) paragraphs. Added text is underlined, and deleted text is struck out.

Amendments to Chapter 3 of Concepts Statement 8

2. Amend paragraph QC11 and add paragraphs QC11A and QC11B as follows:

Materiality

QC11. Information is material if omitting it or misstating it could influence decisions

that users make on the basis of the financial information of a specific reporting
entity. In other words, materiality is an entity-specific aspect of relevance based on
the nature or magnitude or both of the items to which the information relates in the
context of an individual entity’s financial report. Consequently, the Board cannot
specify a uniform quantitative threshold for materiality or predetermine what could
be material in a particular situation. Relevance and materiality are defined by what
influences or makes a difference to an investor or other decision maker; however,
the two concepts can be distinguished from each other. Relevance is a general
notion about what type of information is useful to investors. Materiality is entity
specific. The omission or misstatement of an item in a financial report is material
if, in light of surrounding circumstances, the magnitude of the item is such that it is
probable that the judgment of a reasonable person relying upon the report would
have been changed or influenced by the inclusion or correction of the item.

QC11A. A decision not to disclose certain information or recognize an economic

phenomenon may be made, for example, because the amounts involved are too
small to make a difference to an investor or other decision maker (they are
immaterial). However, magnitude by itself, without regard to the nature of the item

3
and the circumstances in which the judgment has to be made, generally is not a
sufficient basis for a materiality judgment.
QC11B. No general standards of materiality could be formulated to take into
account all the considerations that enter into judgments made by an experienced,
reasonable provider of financial information. That is because materiality judgments
can properly be made only by those that understand the reporting entity’s pertinent
facts and circumstances. Whenever an authoritative body imposes materiality
rules or standards, it is substituting generalized collective judgments for specific
individual judgments, and there is no reason to suppose that the collective
judgments always are superior.

3. Amend paragraph BC3.18 and add paragraphs BC3.18A–BC3.18D as follows:

Materiality
BC3.18 The Discussion Paper (July 6, 2006, FASB Preliminary Views, Conceptual
Framework for Financial Reporting: Objective of Financial Reporting and
Qualitative Characteristics of Decision-Useful Financial Reporting Information) and
the Exposure Draft (May 29, 2008, FASB Exposure Draft, Conceptual Framework
for Financial Reporting: The Objective of Financial Reporting and Qualitative
Characteristics and Constraints of Decision-Useful Financial Reporting
Information) proposed that materiality is a pervasive constraint in financial
reporting because it is pertinent to all of the qualitative characteristics. However,
someSome respondents to the Exposure Draft agreed that although materiality is
pervasive,any entity can consider materiality in its reporting decisions; however, it
is not a constraint on a reporting entity’s ability to report information because the
entity can choose to report immaterial information. Rather, materiality is an aspect
of relevance because immaterial information does not affect a user’s decision.
Furthermore, a standard setter does not consider materiality when developing
standards because it is an entity-specific consideration. As a result, entity-specific
\assessments of materiality are not directly relevant to the Board’s assessments on
whether the guidance that the Board sets meets the qualitative characteristics of
financial reporting. Instead, the Board evaluates the potential relevance of its
guidance (and other qualitative characteristics of the reported information) in the
context of a broader financial reporting environment rather than on the materiality
of the information to individual entities.The Boards agreed with those views and
concluded that materiality is an aspect of relevance that applies at the individual
entity level.

BC3.18A The Board decided to continue to include a discussion of materiality in

the Concepts Statements to (a) demonstrate its understanding of the reporting
environment in which the guidance it sets is applied and (b) highlight the difference
between relevance and materiality.

4
BC3.18B The Board observed that the definition of materiality in this chapter as
originally issued is inconsistent with the definitions and discussions by the U.S.
Securities and Exchange Commission (SEC), auditing standards of the Public
Company Accounting Oversight Board (PCAOB) and the American Institute of
Certified Public Accountants (AICPA), and the judicial system in the United States.
That inconsistency does not help the Board to understand the environment in
which reporting entities operate. In September 2015, the Board issued proposed
Accounting Standards Update, Notes to Financial Statements (Topic 235):
Assessing Whether Disclosures Are Material, which stated that materiality is a
legal concept and that the Board observed that the U.S. Supreme Court definition
of materiality is the appropriate definition. Preparers and practitioners objected to
stating that materiality is a legal concept because it may imply that only legal
professionals can make materiality judgments and that materiality should be
considered an accounting concept. Others objected to the citing of the U.S.
Supreme Court definition of materiality because of its origins in antifraud litigation.
Still others stated that the meaning of the term is debatable and there is a concern
that the definition may change. Some stakeholders suggested that the definition in
Concepts Statement 25a would be a better definition. After considering the
feedback, the Board decided to replace the current definition of materiality in this
chapter with the superseded definition in Concepts Statement 2. The definition of
materiality that is in Concepts Statement 2 is quoted in SEC Staff Accounting
Bulletin No. 99, Materiality. SAB 99 notes that the definition that is in Concepts
Statement 2 is in substance identical to the definition of the U.S. Supreme Court,
which in turn results in the definition in this chapter being in substance identical to
the definition in the auditing standards of the AICPA and the PCAOB.
BC3.18C The Board decided not to incorporate all the content of the definition of
materiality from Concepts Statement 2 into this chapter. The language that was
not carried forward included, in large part, examples of how one might think about
a materiality assessment. In the Board’s view, the examples in Concepts
Statement 2 were not necessary to capture the substance of the definition.
BC3.18D The Board is aware that the discussion of materiality as amended in this
Concepts Statement is no longer identical to the definition in the International
Accounting Standards Board’s (IASB) Conceptual Framework for Financial
Reporting, though both were identical when originally issued. IAS 1, Presentation
of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting
Estimates and Errors, also include definitions of materiality. It is preferable that
both the FASB’s and the IASB’s Conceptual Frameworks converge. However, that
is not possible because (a) the IASB’s definitions of materiality are not consistent
with the definition used in the United States and (b) the IASB is working to further
amend its definitions of materiality.

5aSuperseded.

5
The amendments in this Concepts Statement were adopted by the unanimous vote
of the seven members of the Financial Accounting Standards Board:

Russell G. Golden, Chairman

James L. Kroeker, Vice Chairman
Christine A. Botosan
Marsha L. Hunt
Harold L. Monk, Jr.
R. Harold Schroeder
Marc A. Siegel